Cause, effect, globalisation and the Chinese connection
Tuesday, 18 December 2007
John Authers
WE live in an interconnected world. There is a tendency to believe that this is a new development, at least for financial markets.
It is not. Almost 30 years ago, the British television journalist James Burke expounded what he called "an alternative view of change" in a series of documentaries called Connections.
Denying that human advancement followed a straight line, he suggested that the key inventions of the modern world were the result of numerous interconnected events. In each one, somebody acted out of their own self-interest, with no particular thought of what the final result might be.
This allowed for some playful connections between apparently unconnected events. It is a game that can be played very easily on the modern financial markets.
Let us start with the opening of the Chinese economy and the beginning of China's epic growth.
That had lots of effects, but one to look at is that it appears to have pushed up the price of oil. As cited in this column earlier, the marginal demand from China to feed the impressive growth there has crowded out other demand and pushed up oil prices.
The rising price of oil made it much more important to look for alternatives to oil.
Nobody much listened to environmentalists while oil was below $20 a barrel in the late 1990s. Americans, in particular, carried on buying gas-guzzling cars. With oil more expensive, the search for alternatives became much more serious.
One of the most attractive alternatives to oil that was put forward was ethanol, which can be produced from raw materials such as sugar cane (popular in Brazil) or corn (more popular in the US). So that led to a huge investment in ethanol.
That had the effect of pushing up the price of corn. And that in turn prompted farmers to follow what the market was telling them, and to convert production to corn.
The problem with that is that the acres now devoted to corn could no longer produce the crops that had been there before. One crop that gave way tended to be soya beans. So that restricted the supply of soya beans, which pushed up the price.
Thanks to prodigious Chinese growth, soya beans were in demand anyway: China's farmers needed soya beans to feed their hogs. That also pushed up the price. In consequence, soya bean futures have gained more than 80 per cent over the past year, and they are now at a 34-year high.
All of this is great news for those farmers who happen to be producing soya beans. And they tend to be in Iowa, the US state that dominates soya bean production outside Brazil.
Farmers in Iowa, and elsewhere in the US, often complain about the effects of globalisation, and with some reason. But it does appear that this time round, free trade is going to make a lot of farmers much richer than they thought they would be.
Is there a further connection to be drawn from this? Well, yes, but the consequences remain uncertain. Iowa does not merely dominate the supply of certain foodstuffs, it also has a dominant position in the process that will decide who will become president of the US in 2009.
If Iowans are feeling richer, they may feel less angry, and this could affect the way they vote in their caucuses at the beginning of next month. That could affect the identity of the next US president in ways that we cannot predict.
Iowa is also the host to the markets that give you the best way to make a bet on the presidential process. The Iowa Electronic Markets offer futures on who will win the presidency, and on the two parties' nominations. Both show remarkable uncertainty.
On the Democratic side, Hillary Clinton is a clear front-runner: the Iowa markets give her a 70 per cent chance of winning. But Barack Obama futures have been rising, and now give him a much less familiar quantity for international investors: a 30 per cent chance of winning.
On the Republican side, there has been exceptional volatility. Nobody seems to have more than a 30 per cent chance of winning the nomination.
Such uncertainty over the presidential nominees, with neither the incumbent president nor the vice- president in the running for the first time since 1952, could be important for markets next year. That is both because the next president will have important decisions to make and because the openness of the race could affect the behaviour of American politicians during the year.
In particular, if the woes of the US mortgage market get much worse, there will be political pressures to spend public money attacking the problem. That could have an effect on global credit markets.
With the US in a nationalistic mood, it is quite possible that candidates will feel the need to resort to protectionist rhetoric. This might arguably be good politics, even if it is bad policy. And the threat of US protectionism is one of the most critical issues facing the whole world economy for 2008.
If American politicians did try to put globalisation back into reverse, that could have an effect on the demand coming from China.
FT Syndication Service
WE live in an interconnected world. There is a tendency to believe that this is a new development, at least for financial markets.
It is not. Almost 30 years ago, the British television journalist James Burke expounded what he called "an alternative view of change" in a series of documentaries called Connections.
Denying that human advancement followed a straight line, he suggested that the key inventions of the modern world were the result of numerous interconnected events. In each one, somebody acted out of their own self-interest, with no particular thought of what the final result might be.
This allowed for some playful connections between apparently unconnected events. It is a game that can be played very easily on the modern financial markets.
Let us start with the opening of the Chinese economy and the beginning of China's epic growth.
That had lots of effects, but one to look at is that it appears to have pushed up the price of oil. As cited in this column earlier, the marginal demand from China to feed the impressive growth there has crowded out other demand and pushed up oil prices.
The rising price of oil made it much more important to look for alternatives to oil.
Nobody much listened to environmentalists while oil was below $20 a barrel in the late 1990s. Americans, in particular, carried on buying gas-guzzling cars. With oil more expensive, the search for alternatives became much more serious.
One of the most attractive alternatives to oil that was put forward was ethanol, which can be produced from raw materials such as sugar cane (popular in Brazil) or corn (more popular in the US). So that led to a huge investment in ethanol.
That had the effect of pushing up the price of corn. And that in turn prompted farmers to follow what the market was telling them, and to convert production to corn.
The problem with that is that the acres now devoted to corn could no longer produce the crops that had been there before. One crop that gave way tended to be soya beans. So that restricted the supply of soya beans, which pushed up the price.
Thanks to prodigious Chinese growth, soya beans were in demand anyway: China's farmers needed soya beans to feed their hogs. That also pushed up the price. In consequence, soya bean futures have gained more than 80 per cent over the past year, and they are now at a 34-year high.
All of this is great news for those farmers who happen to be producing soya beans. And they tend to be in Iowa, the US state that dominates soya bean production outside Brazil.
Farmers in Iowa, and elsewhere in the US, often complain about the effects of globalisation, and with some reason. But it does appear that this time round, free trade is going to make a lot of farmers much richer than they thought they would be.
Is there a further connection to be drawn from this? Well, yes, but the consequences remain uncertain. Iowa does not merely dominate the supply of certain foodstuffs, it also has a dominant position in the process that will decide who will become president of the US in 2009.
If Iowans are feeling richer, they may feel less angry, and this could affect the way they vote in their caucuses at the beginning of next month. That could affect the identity of the next US president in ways that we cannot predict.
Iowa is also the host to the markets that give you the best way to make a bet on the presidential process. The Iowa Electronic Markets offer futures on who will win the presidency, and on the two parties' nominations. Both show remarkable uncertainty.
On the Democratic side, Hillary Clinton is a clear front-runner: the Iowa markets give her a 70 per cent chance of winning. But Barack Obama futures have been rising, and now give him a much less familiar quantity for international investors: a 30 per cent chance of winning.
On the Republican side, there has been exceptional volatility. Nobody seems to have more than a 30 per cent chance of winning the nomination.
Such uncertainty over the presidential nominees, with neither the incumbent president nor the vice- president in the running for the first time since 1952, could be important for markets next year. That is both because the next president will have important decisions to make and because the openness of the race could affect the behaviour of American politicians during the year.
In particular, if the woes of the US mortgage market get much worse, there will be political pressures to spend public money attacking the problem. That could have an effect on global credit markets.
With the US in a nationalistic mood, it is quite possible that candidates will feel the need to resort to protectionist rhetoric. This might arguably be good politics, even if it is bad policy. And the threat of US protectionism is one of the most critical issues facing the whole world economy for 2008.
If American politicians did try to put globalisation back into reverse, that could have an effect on the demand coming from China.
FT Syndication Service